The Court of Appeals for the Federal Circuit affirmed in part and vacated in part the decision of the District Court for the Eastern District of Texas, which had found the appellants (collectively “EchoStar”) in contempt of two provisions of the court’s previous permanent injunction order.

In its en banc decision, the Federal Circuit vacated the district court’s finding that EchoStar was in contempt of the provision of the permanent injunction that forbid it from infringing TiVo’s DVR software patents. The court overruled its two-step KSM inquiry for reviewing post-infringement contempt proceedings and replaced it with a new test that goes straight into the “more than colorable differences test.” The case was remanded to the district court for a factual determination of whether there are more than colorable differences between the prior infringing product and EchoStar’s modified product. However, the court affirmed the district court’s finding of contempt for the disablement provision of the injunction.

Forbes provides a brief overview of the case. Patently-O outlines the new rules for post-infringement contempt proceedings. CNET, which reported on the parties’ views of the outcome, states that EchoStar plans to appeal the case to the Supreme Court, and to seek a stay on the injunction in the meantime.

The Tivo v. EchoStar saga began back in 2004, when Tivo successfully sued EchoStar for infringing its DVR patents. At that time, the district court issued a permanent injunction against EchoStar and required it to disable the DVR functionality in all existing infringing products. The Federal Circuit affirmed the decision as to the software claims only. When EchoStar modified its product in order to avoid infringement, TiVo moved for a finding of contempt and the district court granted the order as to both the infringement provision and the disablement provision of the injunction. EchoStar appealed. A panel of the Federal Circuit affirmed, and the Federal Circuit granted EchoStar’s petition for rehearing en banc to clarify the standard for determining post-infringement contempt.

After a rehearing en banc, the Federal Circuit vacated the finding of contempt as to infringement under its new test. The case was remanded for the district court to determine whether EchoStar’s replacement of the start code detection feature with a statistical estimation feature was adequate to be more than mere “colorable difference.”

In holding as it did, the court stated that only if the modified product had no more than “colorable differences” from the prior infringing product would the defendant would be in contempt. The test for finding more than “colorable differences” is whether the new product is so different from the prior infringing product that it raises “a fair ground of doubt as to the wrongfulness of the defendant’s conduct.” The analysis may also consider the policy that legitimate design-around efforts should be encouraged to stimulate innovation.

The court affirmed the district court’s finding of contempt for the disablement provision, concluding that EchoStar had waived its vagueness and overbreadth arguments against the provision. Its reasoning was that even if the injunction was facially vague, the burden was on EchoStar to seek clarification from the district court at the time of the injunction. As a policy matter, to allow EchoStar to raise the defense later would impose “an unnecessarily heavy burden on district courts to draft immaculate orders” and would “radically constrict” district courts’ power to enforce injunctions.

Judge Dyk filed a dissenting opinion joined by four other judges. The dissent disagreed with the majority’s decision to affirm the district court’s finding on the disablement provision and its decision to remand the case for further consideration of colorable differences, arguing that both findings of contempt should have been reversed outright. On the disablement provision in particular, the dissent believed that the provision does not bar the installation of modified software that “renders the devices non-infringing,” and case law supports the rule that if an injunction is vague, the injunction cannot be the basis for contempt.

This case substantially changes the test for review of contempt orders. The holding may still give patentees an advantage because it requires deference to the district court’s decision to initiate a contempt proceeding. The case is something of a victory for TiVo because although the Federal Circuit vacated the district court’s award of $110 million to TiVo for continued infringement using modified software pending the remand, it affirmed a $90 million sanction for contempt against EchoStar.